Police SWAT teams and hostage negotiators have been locked in a standoff with a gunman authorities say killed a school bus driver, snatched a kindergartener and retreated into a bunker at his Alabama home.

Neighbours described the gunman as a paranoid and combative man who once beat a dog to death with a lead pipe, threatened to shoot children for setting foot on his property and patrolled his yard at night with a flashlight and a shotgun.

The gunman, identified by neighbours as Jimmy Lee Dykes, a 65-year-old retired truck driver, was supposed to appear in court on Wednesday to answer charges he shot at his neighbours in a dispute over a speed bump.

The standoff that began on Tuesday dragged on through the night and into Wednesday evening after the gunman boarded a stopped school bus in the small town of Midland City, authorities said.

The standoff began Tuesday night

Sheriff Wally Olsen said the man shot the bus driver when he refused to let a six-year-old child off the bus. The gunman then took the boy away.

Mr Olsen said in a statement on Wednesday night that police negotiators are still talking to the suspect, and that they do not believe the child has been harmed.

The bus driver, 66-year-old Charles Albert Poland Jr, was hailed by School Superintendent Donny Bynum as a hero who gave his life to protect 21 students.

Poland Jr was driving this bus when he was fatally shot

About 50 vehicles from federal, state and local agencies were clustered at the end of a dirt road near Dykes' home.

An Alabama legislator, who said he met with authorities and visited the child's family, said the boy has been able to receive medicine and watch TV.

State Representative Steve Clouse described the standoff as a "static situation" and "a waiting game". Authorities told him that the bunker on the suspect's property has electricity, food and a TV.

Police have not said whether Dykes has made any demands.

Homes nearby were evacuated early in the morning after authorities found what was believed to be a bomb on his property.

A sheriff's deputy mans a roadblock near the property

County Coroner Woodrow Hilboldt said Dykes was believed to be holed up in an underground bunker of the sort used to take shelter from a tornado.

Mike and Patricia Smith, who live across the street from Dykes and whose two children were on the bus when the shooting happened, said their youngsters had a run-in with him about 10 months ago.

"My bulldogs got loose and went over there," Patricia Smith said. "The children went to get them. He threatened to shoot them if they came back."

"He's very paranoid," her husband said. "He goes around in his yard at night with a flashlight and shotgun."

Patricia Smith said her children told her Dykes stepped onto the bus and grabbed the door so the driver could not close it. Dykes told the driver he wanted two boys, six to eight years old, without saying why.

According to Mrs Smith, Dykes started to step into the aisle of the bus and the driver put his arm out to block him. Dykes fired four shots at Poland with a handgun, she said.

"He did give his life, saving children," Mike Smith said.

After being alerted to the shooting by her children, Patricia Smith ran over to the bus and saw the driver slumped over in his seat.